Risk preferences and changes in background risk

We present two theorems that yield necessary and sufficient conditions for first- and second-degree stochastic dominance deteriorations of background risk to increase risk aversion with respect to foreground risk. We require that any change in a foreground risk that is undesirable remains so after a background risk changes in a way that is either unfair, undesirable in the sense of reducing expected utility, or undesirable in the sense of increasing expected marginal utility. Our results thus characterize utility functions that are, respectively, vulnerable, proper, or standard with respect to changes in background risk.

Risk and time preferences of entrepreneurs: evidence from a Danish field experiment

To understand how small business entrepreneurs respond to government policy one has to know their risk and time preferences. Are they risk averse, or have high discount rates, such that they are hard to motivate? We have conducted a set of field experiments in Denmark that will allow a direct characterization of small business entrepreneurs in terms of these traits. We build on experimental tasks that are well established in the literature. The results do not suggest that small business entrepreneurs are more or less risk averse than the general population under the assumption of Expected Utility Theory. However, we generally find an S-shaped probability weighting function for both small business entrepreneurs and non-entrepreneurs, with entrepreneurs being more optimistic about the chance of occurrence for the best outcome in lotteries with real monetary outcomes. The results also point to a significant difference in individual discount rates between entrepreneurs and non-entrepreneurs: entrepreneurs are willing to wait longer for certain rewards than the general population.     

Risk preferences of Australian academics: where retirement funds are invested tells the story

Risk preferences of Australian academics are elicited by analyzing the aggregate distribution of their retirement funds (superannuation) across available investment options. Not more than 10 % of retirement funds are invested as if their owners maximize expected utility under the assumption of constant relative risk aversion with an empirically plausible level of risk aversion. An implausibly high level of risk aversion is required to rationalize any investment into bonds when stocks are available. Not more than 36.54 % of all investments can be rationalized by a model of loss averse preferences. Moreover, the levels of loss aversion typically reported in the experimental studies imply overinvestment in bonds, which is not observed in the data. Up to 67.18 % of all investments can be rationalized by rank-dependent utility or Yaari’s (Econometrica 55:95–115 1987) dual model with empirically plausible parameters. A median Australian academic behaves as if maximizing rank-dependent utility with parameter \(\gamma \in [0.76, 0.79]\) in a Tversky and Kahneman (J Risk Uncertain 5:297–323 1992) probability weighting function.     

Democracy and interdependent preferences

In a democracy, the views and wishes of the citizens are to count. The problem here is how this dictum is to be understood. I suggest that a proper analysis requires that each person's preferences be seen in the context of his beliefs concerning the preferences of the others and of the preferences he would have if he held different beliefs. Preferences founded on erroneous beliefs call for special consideration. So also do certain reluctantly held preferences. I propose a decision-policy involving the identification of social equilibria of preference.     

Time preferences and consumer behavior

We investigate the predictive power of survey-elicited time preferences. The discount factor elicited from choice experiments using real payments predicts various health, energy, and financial outcomes, including overall self-reported health, smoking, installing energy-efficient lighting, and credit card balance. Allowing for time-inconsistent preferences, both the long-run and present-bias discount factors (δ and β) are also significantly associated in the expected direction with several outcomes. We consider several hypotheses regarding the strength of the association between discount factors and outcomes, such as salience of the outcome or liquidity constraints.     

Heterogeneous risk and time preferences

Assessing individuals’ time and risk preferences is crucial in domains such as health-related decisions (e.g., dieting, addictions), environmentally-friendly practices, and saving opportunities. We propose a new method to jointly elicit and estimate risk attitudes and intertemporal choices. We use a novel individual level estimation procedure based on a hierarchical Bayes methodology, which can integrate different functional forms for discounting and risk attitudes. This method provides individual level estimates, and allows us to explore the heterogeneity in the data. In addition, we report a negative correlation between risk and time preferences, implying that risk-seeking individuals are less patient and less willing to defer consumption.     

Uncertain discount and hyperbolic preferences

This paper studies the interaction between savagean uncertainty and time preferences. We introduce a variation of the discounted subjective expected utility model, where time preferences are state dependent. Before uncertainty is resolved, the individual is unsure about the discount factor that will be used, even when evaluating certain payoffs. The model can account for the present bias and diminishing impatience, even if the future is discounted geometrically. The present bias disappears when the immediate payoff becomes uncertain. Although preferences are not stationary, choices may be time consistent.     

Risk management in a globalizing world: An empirical analysis of individual preferences in 26 European countries

The risks that individuals face in everyday life, such as illness and unemployment, can be covered using market, government, or community mechanisms. The market can function with a lower level of solidarity compared to the other two mechanisms; the government mechanism requires the highest level of compulsory solidarity and communities are associated with voluntary solidarity. Social context affects individual preferences with regard to any one of these mechanisms. This article investigates to what extent these preferences are influenced by globalization: the economic, social and political openness of countries. The dataset used in this study combines data from the European Values Study 1999-2000 (EVS), the International Monetary Fund (IMF), and the KOF Index of Globalization, and contains information about 31,554 people living in 26 European countries. The results derived from logistic multilevel analysis show that preferences towards the organization of solidarity are related to the different dimensions of globalization.     

Participatory community organizing revisited: political involvement and social development in two post-socialist villages in north China

The paper, based on seven months of intensive ethnographic fieldwork in two neighbouring villages in north China, describes a more complicated relationship between members' political involvement and community social development than is generally perceived in literature. The intriguing mechanisms and contents of political participation presented call for a close examination of grassroots political economy, local authority, democratic institutions, and community organizing in the specific social contexts of post-socialist rural China under reforms. The study argues that a context-sensitive understanding of participatory democracy and community development is necessary for the success of macro social work practices, and therefore needs to be built into the curriculum of community organizing and international social work and addressed in social work professional training.     

Race and baseball memorabilia revisited

This paper extends previous research on customer racial discrimination in the market for baseball memorabilia. Specifically, it investigates if there is evidence that differential prices for baseball cards can be explained at least in part by race. First, it analyzes 2008 prices for cards of recently retired players and compares these results to a previously published study. Then it re-examines the 1994 price differentials found in the previous study by analyzing the 2008 prices for those cards. In particular, changes in the effect of race on card prices motivate a discussion about how attitudes toward race have varied over time.     

Dopamine receptor genes predict risk preferences,time preferences,and related economic choices

Outside of economics, researchers have recently identified genetic predictors of “sensation-seeking” that have been linked to risky and impulsive behaviors. We examine the implications of these genetic polymorphisms for economic behavior. Our analysis indicates that the 7-repeat allele of the DRD4 gene that regulates dopamine uptake in the brain predicts risk-taking and time preferences in economic experiments that allow for ambiguity, losses and discounting. These genetic polymorphisms can also be used to directly predict financial choice patterns that are consistent with previous findings in the behavioral genetics literature.     

Imprecise preferences and the WTP-WTA disparity

This article reports the results of a study designed to elicit willingness to pay (WTP) and willingness to accept (WTA) values for changes in the risk of nonfatal road injuries. We examine the possibility that individuals' preferences over combinations of wealth, risk, and safety are imprecise, and that this imprecision might result in the observed disparity between WTP and WTA measures of value. The results confirm that individuals' preferences for safety are significantly imprecise, but that this alone is insufficient to explain more than part of the disparity. Indeed, respondents' estimates of the minimum that they would be prepared to accept for a risk increase frequently exceed the maximum that they would be prepared to pay for an equivalent risk reduction.     

Noise and bias in eliciting preferences

In the context of eliciting preferences for decision making under risk, we analyse the features of four different elicitation methods—pairwise choice, willingness-to-pay, willingness-to-accept, and the Becker-DeGroot-Marschak mechanism—and estimate noise, bias and risk attitudes for two different preference functionals, Expected Utility and Rank-Dependent Expected Utility. It is well-known that methods differ in terms of the bias in the elicitation; it is rather less well-known that methods differ in terms of their noisiness. It has also been reported that risk attitudes are not stable across different elicitation methods. Our results suggest that elicited preferences should only be used in the context in which they were elicited, and the bias in the certainty-equivalent methods should be kept in mind when making predictions based on the elicited preferences. Moreover, conclusions should be moderated to take into account the various methods’ noise, which is generally lowest in the case of pairwise choice.     

Fiscal and monetary policy rules revisited

Why have automatic procedures designed to limit or eliminate the discretion of policy-makers become popular in recent years? The first part of the paper addresses fiscal policy rules by analyzing their political appeal as restrainers, symbols, partisan weapons, and ideological statements. The second part of the paper considers monetary policy rules and their rationales, and critiques them. We argue that fiscal and monetary policy rules may not be as efficacious as their supporters claim, and they raise new problems stemming from their biases, rigidity, and antidemocratic implications.     

Interpersonal dependency of preferences

Standard decision theoretic models disregard the phenomenon of interpersonal dependency of preferences. In this paper it is argued that interpersonal dependency of preferences is a serious challenge for standard utility theory. First we sketch the more philosophical aspects of the problem and then, using a simple, formal model for the two-person case, we show that interpersonal dependency of preferences generally results in indeterminacy of preferences (resp. of subjective utility).     

Subjective probabilities and utility with event-dependent preferences

This article generalizes Savage's theory to include event-dependent preferences. The state space is partitioned into finitely many events. The induced preferences over consequences are assumed independent of the underlying states within, but not across, these events. This results in an additively separable representation of preferences over acts. The dependence of the preference relation over consequences on the events is represented by event-dependent mappings of the set of consequences onto itself. Given these mappings, the preferences on acts are represented by the expectation of event-dependent utilities on the consequences with respect to unique subjective probabilities on the states.Helpful discussions with David Schmeidler are gratefully acknowledged.     

Mean variance preferences and the heat equation

Chipman (1979) proves that for an expected utility maximizer choosing from a domain of normal distributions with mean and variance ² the induced preference functionV(, ) satisfies a differential equation known as the heat equation. The purpose of this note is to provide a generalization and simple proof of this result which does not depend on the normality assumption.